Story Of The Week

World Economy in 2014- A Reflection

“The world economy is flying with only one engine”- this statement was one of the headlines in the guardian in 2014. Unless one understands the underlying analogy based on which this statement is written, it is just a statement but when we delve deeper into, this very statement becomes a thought.

According to the report, the global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglo sphere (the United States and its close cousin, the United Kingdom).

The second engine – the eurozone – has now stalled after an anemic post-2008 restart. Indeed,

Europe is one shock away from outright deflation and another bout of recession. Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus. And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds – rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds.

Post 2008 recession, US has learned its lessons and working on improving the underlying base of its economy. But the problem is that other countries are now suffering from slowdowns, as a result, the dollar is strengthening. Hence, US is not able to decouple itself from the rest.

While the Eurozone did continue to grow, it failed to gain momentum. News has started to emerge that now the European powerhouse – Germany, may have been affected from the Eurozone crisis. It is very much evident from the falling economic activity in second quarter of 2014. Amid all the gloom, a positive ray of hope was the resurgence of Greek economy. But these are still early days. Unemployment remains excruciatingly high.

President Shinzo Abe’s persistent efforts to bring Japan’s economy back on track didn’t bear fruit. The decision to increase tax on consumer spending to handle the ever increasing debt boomeranged. Consequently, it has forced government to delay the next tax rise it was planning.

All is not well in the emerging economies as well. Of the five BRICS economies (Brazil, Russia, India, China, and South Africa), three (Brazil, Russia, and South Africa) are close to recession. The biggest, China, is in the midst of a structural slowdown that will push its growth rate closer to 5% in the next two years, from above 7% now. At the same time, much-touted reforms to rebalance growth from fixed investment to consumption are being postponed until President Xi Jinping consolidates his power. China may avoid a hard landing, but a bumpy and rough one appears likely. But there were also some events which didn’t impacted the world as were expected. The rise of Islamic State in Iraq and Syria did not affect the oil market as was expected, considering the history of previous crises in the Middle East, when a minor problem led to oil prices shooting up the roof. IS had little impact on the global supply of oil, which has been increasingly plentiful due to the shale oil revolution in the US. At the same time, demand for oil has weakened due to the slowdown in China and the persistent sluggishness of the Eurozone and Japan. The effects were evident from the 40% drop in the oil prices in June. That worsened Russia’s financial problems, but it is an economic boost for countries that import oil – which is to say most of the world. Overall, it can be said that rising debts and high inequalities across money distribution are the main causes of the malaise in which the world is. To overcome it, nations need to come up with bold monetary as well as fiscal policies. Campaigns such as “Make in India” launched by Indian prime minister ,Mr. Narendra Modi, to boost local demand and investment in Indian economy might be the way forward for most of the nations ,who have high dependency on Imports. One can only hope that political heads across the globe will rise over pity political interest and think for the overall welfare of their country and the world as well in 2015.

References

  1. BBC News – http://www.bbc.com/news/business-30400861
  2. The Guardian – http://www.theguardian.com/business/2014/nov/02/world-economy-
    flying-one-engine-us-growth
  3. Forbes – http://www.forbes.com/sites/mwakatabe/2014/12/12/the-good-the-bad-and-
    the-ugly-of-abenomics/
  4. The Economist – http://www.economist.com/blogs/freeexchange/2014/10/world-economy
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